May 26, 2023

What is a Credit Card?

Used in the correct way, credit cards can be a useful and flexible way of paying and spreading the cost of major purchases. However, if you can only make minimum payments or run up a bill you cannot pay back it can become costly.

So, what are the ‘pros’ of getting a credit card?

  • Easy to carry and easy to use.
  • Safer than cash.
  • Buy now, pay later.
  • You are protected with purchases between £100 to £30,000.
  • Freebies! Credit Cards usually offer rewards or cashback on selected retailers.

These points make credit cards seem like a pretty good idea, but this is not always the case. When getting a credit card, it is important to understand the risks you will be undertaking and what you are committing yourself to.

Here are the ‘cons’ you should be aware of before getting one.

  • High interest rates
  • Can lead to spiral debt
  • Additional fees
  • Deposits and preauthorisation can cut into your credit limit
  • Expensive to use abroad
  • Late payments affect your credit rating

Cards can be useful for spreading costs and giving you extra protection on your purchases, but they shouldn’t be used to manage long-term debt.

The different types of credit cards are;

Reward Cards - This kind of card rewards you for using it – for example, you may get travel miles, cashback, or store discounts. It often comes with an annual fee and high interest rates, so it’s important to ensure the benefits outweigh the costs. You may need a good credit score to get approved. This type of card should always be repaid in full each month.

Useful for your usual monthly spending such as Groceries, Fuel etc.

Credit Builder Cards – If you have a low credit score these cards may help you build your credit history. They typically have low credit limits and high interest rates, as they are designed for people who are seen as high risk. But paying the monthly bill on time and in full can show lenders you are reliable, helping you get better credit offers in the future.

Purchase Cards – If you ned to spread the cost of a big purchase these cards usually have an interest-free period, which can make them a cheap way to borrow. You’ll need to meet the terms and minimum payments to keep the 0% rate, and it’s best if you can pay off the balance before the interest-free period ends. Typically, you will need a good credit score to get this type of card.

Balance Transfer Cards – If you already have a credit card with a balance, you may be able to reduce the amount of interest you pay, by moving your existing card debt to a balance transfer card – usually for a small fee. These cards typically offer a 0% or low interest rate for a set period. For example, if you had a large item on a purchase card, that you hadn’t managed to repay by the end of the 0% period, you may find it beneficial to transfer the balance onto this type of card. You may need a high credit score to get one. These cards shouldn’t be used for spending on.

Remember, just because your credit card shows an available limit, this is not free money! Anything you borrow will need to be paid back.

If you are using them in a way which you cannot afford it is not for you. You will need to be sensible when using your credit card and always think of the long-term effects of your financial decisions.

Credit Cards are not part of the Quilter Financial Planning offering. We do not advise on or provide advice on Credit Cards. The information contained in this blog is for information purposes only.

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